The $1.5 Trillion Business Tax Change Flying Under the Radar – Richard Rubin June 25, 2017 7:00 a.m. ET


GOP proposal to scrap interest deduction would have profound impact on debt-reliant businesses

Losing the deduction could mean higher tax bills for crop growers who depend on bridge loans to work through seasonal business fluctuations.

Losing the deduction could mean higher tax bills for crop growers who depend on bridge loans to work through seasonal business fluctuations. Photo: Michael Zamora/Associated Press

Republicans looking to rewrite the U.S. tax code are taking aim at one of the foundations of modern finance—the deduction that companies get for interest they pay on debt.

That deduction affects everyone from titans of Wall Street who load up on junk bonds to pay for multibillion-dollar corporate takeovers to wheat farmers in the Midwest looking to make ends meet before harvest. Yet a House Republican proposal to eliminate the deduction has gotten relatively little sustained public attention or lobbying pressure.

Thanks in part to the deduction, the U.S. financial system is heavily oriented toward debt, which is cheaper than equity financing and widely accessible. In 2015, U.S. businesses paid in all $1.3 trillion in gross interest, according to Commerce Department data, equal in magnitude to the total economic output of Australia.

Getting rid of the deduction for net interest expense, as House Republicans propose, would alter finance. It also would generate about $1.5 trillion in revenue for the government over a decade, according to the Tax Foundation, allowing for investment breaks and rate cuts elsewhere in the tax code.

The dollars at stake are even more than another controversial proposal being pushed by House Republicans known as border adjustment, which would tax imports and exempt exports. The border adjustment plan has been under attack from retailersand Republican senators, whose resistance h as put it on the brink of failure. But the idea of eliminating or limiting the interest deduction has generated less vocal opposition, giving it a real chance of passage, perhaps in a scaled-back form.

“The overall goal is to be pro-growth. What we’re proposing is to take the tax preference from the source of funds, borrowing, and take that preference to the use of funds, business investment and buildings, equipment, software, technology,” Rep. Kevin Brady (R., Texas), the author of the plan, said at The Wall Street Journal CFO network this month.

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